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The Development Mechanism And Trading Of Sukuk Bonds Finance Essay

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A Sukuk bond is an Arabic word for financial investment certificates, or sometimes can be refer as Islamic bonds. It is the famous element in the Islamic Finance among the Muslim and non-Muslim. Other than that, sukuk also refer to trust certificates and participation securities. Moreover, it is one of the fastest growing tools in the Islamic capital market that triggered the desire of research and writings of many researchers and scholars, as a result of which is the existence of many academic writings and publications [1]. It has become one of the most dynamic tools for capital mobilization in both the Islamic and conventional capital markets (2007, Umar).

For your information, base on their Islamic law, it is not allowed fixed income and interest bearing bond. After that, Islamic Finance comes out the sukuk bonds to fulfill its investment principles, which is charging or paying the interest. Besides that, it is similar to the financial bonds in the conventional bank, which are proof of ownership title to the investor and utilized by financial institution to raising the fund. For both conventional bonds and sukuk bonds are structured to generate revenue on the physical assets. However, the differentiation between both bonds is sukuk bonds can be consider as modern application of Islamic financial.

Malaysia's fully experience and concrete fundamentals in Islamic finance developed over 30 years, tied with its strength in the domestic sukuk market, offers strong exciting value propositions to government agencies, multinational corporations and multilateral development banks or financial institutions across the world to originate sukuk out of Malaysia. Malaysia leads the global sukuk market, represented by 61% of total sukuk outstanding at the end 2008.2

Development of Sukuk Bonds

What is Sukuk?

Sukuk is an Islamic financial certificate bond but it refuted to conventional bonds, which is debt based instrument and Sukuk is asset based instrument. Sukuk securities adopt the Islamic laws referred to as Shari'ah and it own principles, Islamic religious law, which no all interest can make and its forbid the charging or payment of interest such as fixed income, interest bearing bonds are not permissible in Islam . Sukuk instruments are like a middleman or a bridge to issuers, primarily sovereigns and corporations in other foreign countries such as in the Middle East and Southeast Asia, with a large pool for investor to finding diversify their holdings beyond traditional asset classes. In Sukuk market, fund raised can classified in two way which is an efficient and transparent way in over 100 non-member countries in the world.

Diagram 1: Different between conventional financial and Islamic financial

Selected Historical Highlights

Key Highlights in Malaysia's Islamic Capital Market:

1990: Issuance of first Islamic Corporate bond by Shell MDS Sdn Bhd

1993: Launch of first Islamic Equity unit trust fund by Arab-Malaysian Unit Trust Bhd

1994: First full fledged Islamic stockbroking company, BIMB Securities, was established

1999: Launch of the KLSE Syariah Index

2000: Launch of the first Islamic bond fund by RHB Unit Trust Management

2001: Issuance of the world's first Global Sukuk by Kumpulan Guthrie

Source: Bloomberg (based on Sukuk issued out of new and existing programmes for the YTD )

Global vs Malaysia Sukuk Issuances 2005- 1H20112002: Issuance of the world's first Global Sovereign Sukuk

Figure :Global vs Malaysia Sukuk Issuances 2005- 1H2011

In 2005 to first half of 2011, global Sukuk market and Malaysia Sukuk market was faced few economic growth and crisis, therefore it was effect issued Sukuk bond. Based on the data, Malaysia Sukuk market doesn't showed significant growth compared with global Sukuk market between 2005 to first half of 2011. However Malaysia Sukuk market looks more stable than global market.

In 2008, global Sukuk faced financial meltdown, it is global financial crisis and the Dubai debt woes, therefore it dropped from US$31 billion to US$14.2 billion, dropped around 54%. Besides that, Malaysia Sukuk market also dropped, but the dropped amount lower than global market, around 41%.Apart from that, in 2009 Malaysia Sukuk market of the total Sukuk issuance growth around 31%, it was showed those investor have confidence to Malaysia Sukuk market.

http://biz.thestar.com.my/archives/2009/9/9/business/p8-sukukcht.JPG

Figure 2:Sukuk issuance by country in 2009

In 2009, Malaysia is the largest country issuer Sukuk bond compare with Indonesia, Sausi Arabia and Bahrain.Malaysia almost having around 45% of issuer Sukuk bond. The second largest is Saudi Arabia, they has around 22% for issuer Sukuk bond.

Figure 3 Malaysia: Outstanding Sukuk vs. Bonds

In this several years, Sukuk continues growth but compare with normal bond, amount of outstanding Sukuk still lower than bond. In 2011, Sukuk still not famous for the investor or issuer therefore the number was just had small amount for the outstanding Sukuk. Besides that, between 2001 and 2007 the amount of outstanding Sukuk was growth significantly. In 2007, outstanding Sukuk was catching up the normal bond and after year 2007 outstanding Sukuk still having a positive growth in the market.

This three chart showed that investor have confidence with Malaysia Sukuk market because it has its potential. In 1990s, Malaysia already had a powerful and transparent Islamic structure. Other than that, Malaysia also do more effort to promoted to foreign investor show that Malaysia is an international Islamic financial hub and had recognized by worldwide and continues lead at the front of the development of Sukuk bond.

The strength of Sukuk is lies in its own unique framework. Sukuk can carry distinct value position to issuers and investors. The Sukuk growths rapidly because had few factors.

1. Structure growth sophistication. Sukuk have a good superiority which is it had the flexibility of Sukuk structure to lead its growth continuously and it also can meet the requirement and preferences of investor and issuers by tailored suitable Sukuk to them. Now a day, Malaysia have more than a types of Sukuk in the market such as profit and loss sharing (Musyarakah), cost plus financing (Murabahah), deferred payment (Al-Bai' Bithaman Ajil), leasing (Al-Ijarah), agent(Al-Wakalah) and so on to wider range of investors.

Figure 4: Type of Sukuk apporeved in Malaysia

In 2011, Malaysia has few types of Sukuk approved in Malaysia Sukuk market and types of Sukuk in Malaysia market can classified to Contracts of participation and exchange. Contracts of participation are such as Mudharabah Sukuk and Musyarakah Sukuk. Contracts of exchanges are such as Murabahah and Ijarah. The largest number of investor invest is Musyarakah, the number is around 63% in Sukuk market. The second largest is Ijarah, it's around 15% in Sukuk market.

2. Clarity on the regulatory treatment. Excellent regulatory treatment in Sukuk structure has provided regulatory certainty to Islamic financial institutions with regard to their investments.The adherence of the Capital Adequacy Standard was accomplish and issued by the Islamic Financial Services Board (IFSB)

3. Strategic centralize to develop overall Islamic financial system. Every investor or issuers have it own demand or requirement therefore Sukuk can base on each investor or issuers to choice suitable own Sukuk to themselves. For example, in takaful operators the investors can choice medium or long-term liabilities of takaful funds.

2.1 Introduction to Mechanism of Sukuk Bond

Sukuk bond is one of the Islamic financial products which grow rapidly nowadays. It is generally known as Shariah compliant [1] bond as it is structured according to the Islamic principles. The Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) has defined sukuk as the certificates of equal value that represent an undivided share in the ownership of the underlying asset, usufruct, services or investments in particular projects or special investment activities. (Institutions, 2008) Besides, sukuk bond also can be described as an asset-based investment because the investor which is the sukuk holder owns the undivided interest in the underlying asset even if bad situation occurs.

Sukuk bond is not a debt certificate, hence, the claim of sukuk bond is not just a claim to cash flow but it also represents the ownership claim on a pool of underlying assets. However, under the various types of sukuk which structured based on different Islamic principles, the investor has different rights and obligations. When the sukuk is represent the ownership of the underlying asset such as Ijarah sukuk, the investor can claims not only on the underlying asset. But, at the same time, it can be claimed against the cash flow and revenues generated from the sale of the asset.

Besides, for the sukuk which issued as the sale of asset-based through the contract of exchange such as the Murabahah and Istina sukuk, the investor has the rights to claim against the cash flow from the contract of exchange but not on the physical asset. This is due to the transfer of ownership which is now to the obligator. On the other hand, for the type of sukuk which provide funds for projects such as Musyarakah sukuk and Mudharabah sukuk, the investor has the rights on the undivided interest in the specific investments. The difference in both of this sukuk is just that the musyarakah sukuk holder shares both the profit and loss however the mudharabah sukuk holder share only the profit while loss will not be sharing. (Bank Negara Malaysia and Securities Commission Malaysia, 2009)

There're many types of sukuk bond which is structured based on various approved Islamic concepts and principles. Among the 14 types of sukuk which are identified by AAOIFI, the most common sukuk included Ijarah sukuk (leasing of specific assets) and the Musyarakah sukuk (profit & loss-sharing scheme). There're also other types of sukuk which included Murabahah sukuk (cost-plus sale), Istina sukuk (project finance), Mudharabah sukuk (profit-sharing), Salam sukuk, Hybrid sukuk and so forth. In the end of October 2011, Musyarakah sukuk leads the biggest proportion among the various types of sukuk bond which is 59%. It then was following by Ijarah sukuk (13%), Murabahah sukuk (10%), Mudharabah sukuk (9%) and Wakalah sukuk (9%). (Team, 2012)

2.2 Similarities and Differences between Sukuk Bond and Conventional Bond

Sukuk bond shared some similar characteristics with the conventional bond. For instances, both of these bonds have a fixed term maturity, can bear a coupon and are tradable on the normal yield price. Besides, both of the sukuk bond and conventional bond have similarities in the following features: marketability, rate ability, enhance ability and also the versatility. (What is Sukuk?) Both of them are liquid instruments, therefore can be easily transferred and tradable in the financial markets. Furthermore, both of these bonds are structured based on the assets that generate revenues. The revenue generated from the underlying asset is the source of income to pay for the profit on the sukuk bond. (Bank Negara Malaysia and Securities Commission Malaysia, 2009)

However, there still have differences among the sukuk bond and the conventional bond. First of all, conventional bond is structured in such a way that the "interest" is the main point of all those transactions. The issuance of conventional bond is based on the exchange of paper and it doesn't represent the ownership of conventional bondholders in the enterprises that issue the bond. Rather, it represents the interest-bearing debt owed to the conventional bondholders. Consequently, the issuer of conventional bond has the contractually obligation in paying the interest and also the principal to the bondholders on a specific date. On the other hand, sukuk bond is structured in a way that the issuance is based on the exchange of an approved asset. Because of the prohibition of interest charging by Islamic law, sukuk bond allows the sukuk bondholders to claim an undivided ownership in the underlying asset and share the revenues generated from the underlying asset.

Furthermore, sukuk bond is different with conventional bond due to its asset-based features. When the situation occurs where the issuer of conventional bond is unable to pay for the debt they owed to the bondholders, the bondholders which is the investors will face a great loss on their investments. This is because the contract usually doesn't guarantee that the asset can be secured and be used to recover at least partial of the investments. However, for sukuk bond, because it is asset-based and the sukuk bondholders have undivided ownership on the underlying asset, even how bad the situation, the investors can claim against major part of their investment. Hence, the sukuk bondholders are more protected from this kind of risk compared to the conventional bondholders.

Besides, the issuance of sukuk bond must compliant with the Islamic law in its nature and use. However for the conventional bond, it can be issue for almost any purposes as long as it is legal under jurisdiction. Next, for the sukuk bondholders, the expenses that related to the underlying asset may be attached to them while the conventional bondholders are not responsible in these asset-related expenses.

2.3 Benefits of Sukuk Bond

Sukuk bond which structured compliant with the Islamic law have the following benefits. First of all, it acts as a tool for banks and Islamic financial institutions in liquidity management. (Benefits of Sukuk) When the bank and financial institutions have excess amount of liquidity, they can use these excess money to purchase and invest in sukuk bond.

Meanwhile, when they're in the need of liquidity, they can choose to sell their sukuk bond through the secondary market. This clearly shows the features of sukuk bond which is liquid and hence can be easily traded in the financial market.

Besides, sukuk bond provides a way in raising funds. It allows the corporate to raise funds through the issuance of sukuk bond. However, the sukuk bond can only be issue for any purpose that complaint with Islamic law. Furthermore, due to the asset-based feature of sukuk bond, it offers a lower risk and hence reduces the cost of financing. This is because even when bad situation happen to the issuer of sukuk bond, the investors can claim against the ownership on the underlying asset and get recover from major partial of their investment.

2.4 Sukuk Guidelines

Starts from 1 July 2000, any issuance, offer or invitation of sukuk has to get approval from the Securities Commission Malaysia (SC) under section 212 of the Capital Markets and Services Act 2007 (CMSA) [2] (Malaysia S. C., Introduction, 2011)

The following information are the guidelines which stated by Securities Commission Malaysia (SC) and effective from 12 August 2011 (Malaysia S. C., 2011). Any corporation that wishes to issue, offer or make an invitation of sukuk has to first appoint a principal adviser who specified by the SC in the Principal Adviser Guidelines. The purpose of appointing a principal adviser is to help the corporation to seek approval from SC for the proposed issue, offer or invitation of sukuk. (Malaysia S. C., Issuers & Submission of Proposals, 2011)

There're a set of documents and a declaration letter that SC requires the issuer to submit through the principal adviser. These documents and the declaration letter are needed to obtain the approval from SC. (Malaysia S. C., Appendix, 2011) Two hard copies and one electronic copy of these documents should be submitted. Within 14 working days after SC receives the required documents and declaration letter, SC will either grant its approval or reject the proposal which doesn't fully follow the guideline. Once the issuer obtains the approval from SC, they should submit another set of documents (Malaysia S. C., Appendix, 2011) to SC through their principal adviser. (Malaysia S. C., Documents and Information Required, 2011)

Besides, the issuer is required to conjunct with the principal adviser in appointing a Shariah adviser to make sure that the documentation, structure and the mechanism of sukuk are following the Islamic law. There're plenty of Shariah rulings that have to follow for all types of sukuk as well as some specific type of sukuk in the requirement of underlying asset, asset pricing, compensation and so forth. (Malaysia S. C., Appointment of Shariah Adviser & Shariah Rulings Applicable, 2011)

Meanwhile, the underwriting of any issue, offer or invitation of sukuk will depends on the decision of the issuer. (Malaysia S. C., Underwriting, 2011) The implementation time frame for sukuk issuance is within one year from the date of the approval of SC except for the case of shelf registration scheme which must be implemented within two years. (Malaysia S. C., Implementation Time Frame for Sukuk Programme or Sukuk Issuance, 2011)

2.5 Sukuk Market in Malaysia

From the journal, we know that the sukuk market has been developed rapidly in this decade with the evidence that more than 50% of Malaysia's bond market belong to the sukuk market. Sukuk market in Malaysia successfully attract the attention of international corporations and multilateral agencies and drawn a lots of participation of these parties in raising funds and as well as investing in the sukuk market. Moreover, sukuk market of Malaysia is now having continuous innovation such as it offers the chance for international corporations to participate

and plays a role in our Islamic financial system.

As mentioned before, there have a greater development compared to the beginning of Malaysia's sukuk market which our country started with a RM125 million of issue size by Shell MDS Sdn. Bhd.. The improving development once again can be clearly proven by the shoot up of the value of sukuk issue which is at RM15.4 billion by the Binariang GSM Sdn. Bhd. Besides, Malaysia is the fastest growing country in the global for the area of sukuk market with 22% of

average annual growth within the period of 2001 until 2007.

There're a lots of efforts that has been put in the sukuk market to enhance its stability. First of all, to ensure the financial stability, Malaysia had cooperated with several regulatory authorities and participates in Islamic Financial Services Board (IFSB), Islamic Financial Stability Forum (IFSF), Islamic Development Bank (IDB) and also involve itself in the International Islamic Liquidity Management Corporation (IILM). Besides, the introduction of new type of financial instruments which has the extended maturity profiles has brought the Malaysia's sukuk market to become more innovative. This is because it increases the diversity of both local and foreign participants and also meets the requirements of both issuers and investors so that there will be a win-win situation. Meanwhile, the increasing number of issuance in foreign currency had successfully extended the international gateway and attracts the participations from foreign countries in Malaysia's sukuk market. This in turns speed up the development of our sukuk market and also facilitate a good relationship with the international financial markets.

The development of Malaysia's sukuk market brings the economy to become more diversified and more driven by the private sector than the government. This is shown by the increasing demand for the financing requirements from private sector compared to the market which is previously mainly control by the Government debt securities.

In a nut shell, Malaysia leads the development of sukuk market not only in terms of total sukuk issuance which accounted 68.9% of total global outstanding at the end of 2007, but at the same time showed excellent performance in the innovative sukuk structure and is more competitive in attracting the investors. In the future, Malaysia will continue its efforts to enhance the relationship with others international financial markets through ways such as partnership or maybe cooperation. (Technology, Sukuk Market in Malaysia, 2011)

2.6 Challenges of Sukuk Market

According to the journal, we understand about few challenges that occur in sukuk market. First of all, the sukuk market faced the problem when there is lack of uniformity in the procedures that applied Shariah's principles. The lack of professional in Shariah standards and also the lack of awareness of the employers and manager of sukuk even make the things worse.

Besides, when it comes to the collaborations among the countries, things become challenges because each country has their own laws and some of their laws will conflict with Islamic financial system and has to be amending in order to operate the system. Furthermore, there're still occur the gap of knowledge even though AAOIFI, Central Bank of Malaysia and also other organizations have put efforts in distributing the information to the public. Therefore, more focus have to put at the information dissemination through ways such as forums, training as well as set up more education center.

Last but not least, it is difficult to maintain the unique features of sukuk. This is because those who already get used with the characteristics of conventional products will tend to request for the products which has the same characteristics with conventional products. This in turns will neglect the identity of the unique sukuk bond. (Technology, Challenges in Sukuk Market, 2011)

Trading of Sukuk Market in Malaysia

Between these ten years, the institutional arrangements particular gave a greater focus to develop the sukuk market. The sukuk market now accounts for more than fifty percent of Malaysia's bond market. The market has drawn the participation from a wide range of international corporations and multilateral agencies in raising funds and investing in the sukuk issuances out of Malaysia. More lately, there has also been continuous innovation and an increasing number of issuances in foreign currency. As Malaysia offers international participation in the Islamic financial system, also offer to be an international gateway, particularly in strengthening the link between the two important dynamic growth regions of Asia and the Middle East. (Zeti Akhtar Aziz, 2010)

Shell MDS Sdn. Bhd. started Malaysia's sukuk market with a simple issue size of RM125 million in 1990 and is growing in size and increasingly sophisticated now. This development is evident in the largest sukuk issue recently valued at RM15.4 billion which is USD4.7 billion by Binariang GSM Sdn. Bhd. Now, the sukuk market in Malaysia with an average annual growth of 22% issued for the period 2001-2007 is among the fastest growing in the world. Malaysia has continued it success by introducing innovative sukuk structures such as convertible sukuk musyarakah by Khazanah Nasional Berhad, the Malaysian government investment holding company after introducing the first sovereign global sukuk in the world in 2002. This combines the features of the first full convertibility is usually only used for conventional equity-linked transactions is a historic issue of the first of its kind in the world. (Central Bank of Malaysia, 2007)

Malaysia also continues to collaborate with other regulatory authorities to ensure financial stability in the Islamic financial system. This will be through Malaysia's active involvement in the Islamic Financial Services Board (IFSB), the Islamic Financial Stability Forum (IFSF), the initiatives by the Islamic Development Bank (IDB), and finally in the newly formed International Islamic Liquidity Management Corporation (IILM). Depth and liquidity of the market has increased by secondary trading in the Malaysian sukuk market with the participation of more companies, including foreign-owned companies continued use of this market for funding purposes. Long-term funding needs are financed by a large number of corporate issuance. The diversity and size of the sukuk transaction was the increasing value proposition is very attractive to investors who want to diversify their asset portfolios, therefrom creating a vibrant secondary market.

The Malaysian sukuk market has also grown to become more sophisticated and innovative to meet the multiplex risk-return requirements and profiles of both investors and issuers. Diversified range of players have been generated by the proliferation of new types of instruments with extended maturity profiles , both local and foreign to participate in the market. This was facilitated by the liberalization of the market in 2005 to allow for issuance of debt securities by foreign corporations and multilateral agencies in ringgit denominated papers. This was extended to foreign currency denominated issuances in year 2007. Actually, this has attracted many multilateral agencies, multinational corporations and foreign corporations to raise funds and invest in origination and issuances out of Malaysia, therefore enhancing the Malaysian market, and strengthening Malaysia's inter-linkages with other international financial markets.

The transformation of the Malaysian economy has been accompanied by the development of the sukuk market in Malaysia that has now become more private and diversified sector driven. The Government debt securities initially dominated the market, now reflects the growing demand for the long term financing requirements of the private sector. Now, the corporate sector raises 58% of their financing requirements through the sukuk market and debt securities compared to ten years ago is about 33%. The presence of a liquid and deep debt securities and sukuk market thus contributes towards the stability of the financial system.

Now, with a number of Malaysia's sukuk issues by 68.9%, or USD62 billion (or RM213 billion) of total global outstanding at the end of year 2007, Malaysia is the world's largest sukuk market. Amount of corporate sukuk in Malaysia more than RM30 billion in year 2007. Malaysia not only lead the development of the sukuk market in terms of total sukuk issuance, even in terms of the introduction of innovative sukuk structures and competitive to attract more individual or corporation investors. Moving forward, Malaysia will continue its efforts in strengthening our international linkages in the global Islamic financial system through cooperation and collaborative partnerships with the objective of contributing towards greater economic integration and international financial. Certainly, sukuk ( Islamic bond ) proved that it is among the most successful Islamic financial product in the industry and be one of the fastest-growing sectors in the global financial landscape.

Type of Sukuk Bonds

Ijarah Sukuk

Ijarah sukuk is an Islamic alternate of conventional leasing. Ijarah is a contract the distribution of funds to use right transfer (benefit) of an item within a certain time to the lease payments (ujrah), between the finance company as the lessor (mu'ajjir) with tenants (musta'jir) not followed by transfer of ownership of the goods themselves [1]. These are sukuk that represent ownership of equal shares in a rented real estate or the usufruct of the real estate. In other words, issuing certificates of ownership of assets, leased to a particular consumer is known as Sukuk Al Ijarah or simply Ijarah Sukuk.

Other than that, Ijarah sukuk also is a bond between a bank with consumer to take on an item or even object leases and bank-owned banks have a service fee for items which is rent, and at the end with the purchase of leasing object by the consumer. (In Shaukat's (2010) article, Common Structures of Sukuk, Ijarah sukuk were described as "Ijarah sukuk are the securities representing ownership of well defined existing and known assets tied up to a lease contract, rental of which is the return payable to sukuk holders. " (p. 10).) Ijarah sukuk have a main concept which means selling the benefit of apply or service for a fixed price or salary. Base on this concept, the Islamic bank make it available to the consumer applies of service of assets or equipments for a fixed period of time and also the price.

1Source: Sharia Economy Journal, Ijarah Definition (2011)

Figure 5: The process of Ijarah SukukSukuk al-Ijarah.png

The chart above shows few stages of the transaction process. First stage is Contract of Cash Sale. SPV purchases property from obligator as the step 1 above, such as SPV purchases hospital from government. After that, the assets purchased by the SPV are funded by the issuance of sukuk which is trust certificates which represents beneficial ownership in the assets and the lease as the step 3 shown above. Besides that, government received cash proceeds as step 7 while Stage 2 is Contract of Leasing (Ijarah).

At first, SPV rents property to the government for specified period which is step 2 shown above. After that, step 6 shows that SPV collects rentals. During the tenure, SPV passed the rentals to investors as the step 9. For your information, example is periodic distribution or coupon. Continually, at the maturity, SPV sells the property to the government at an agreed price. Government pays cash to SPV. Lastly, SPV simultaneously pay investors cash for sukuk redemption.

Musharakah Sukuk

Musharakah sukuk is a structure of partnership which is used in Islamic finance instead of interest-bearing loans. It is also a mode of financing against which Sukuks can be issued for. It does not differ from the Mudaraba sukuk except in the organization of the relationship between the party issuing such sukuk and holders of these sukuk, whereby the party issuing sukuk forms a committee from the holders of the sukuk who can be referred to in investment decisions [1]. Musharaka Sukuk are used for mobilizing the funds for establishing a new project or developing an existing one or financing a business activity on the basis of partnership contracts (Shaukat, 2010). Moreover, Musharakah Sukuk have a specified maturity date, and are negotiable in the secondary market.

In the assets of the Musharakah sukuk, for every sukuk would have a representative holder's proportionate ownership. These Musharaka certificates can be treated as negotiable instruments and can be bought and sold in the secondary market [2]. Musharakah sukuk allows each party involved in a business to share in the profits and risks. Other than that, profit earned by the Musharakah sukuk is shared according to an agreed ratio between the Issuer and Investors at an agreement. Although the profit and loss is sharing, while it shared between the investors as per investment ratio only. Besides that, to ensure the tradability of Musharakah sukuks, all the assets should not be in liquid form.

1Source: Accounting and Auditing Organization for Islamic Financial Institution, AAOIFI 2Source:Common Structure of Sukuks, Mughees Shaukat

Figure 6: The process of Musharakah SukukSukuk al-Musharaka.png

From the above shown that, at the beginning, Corporate and the Special Purpose Vehicle (SPV) enter into a Musharakah Arrangement for a fixed period and an agreed profit-sharing ratio. Thus, the corporate undertakes to buy Musharakah shares of the SPV on a periodic basis. First, Corporate (as Musharik) contributes land or other physical assets to the Musharakah. After that, in 2 a & b shown that SPV (as Musharik) contributes cash, which is the issue Proceeds received from the investors to the Musharakah.

Come to the third, the Musharakah appoints the Corporate as an agent to develop the land (or other physical assets) with the cash injected into the Musharaka and sell/lease the developed assets on behalf of the Musharakah. Continually, in return, the agent who is the corporate will get a fixed agency fee plus a variable incentive fee payable. The profits are distributed to the Sukuk holders as shown at above. Lastly, the Corporate irrevocably undertakes to buy at a pre-agreed price the Musharakah shares of the SPV on say semi-annual basis and at the end of the fixed period the SPV would no longer have any shares in the Musharakah.

Mudaraba Sukuk

Mudaraba is a certificate that represents the ownership in transaction managed in the basic of Mudaraba. It is a subclass of Musharakah sukuk. In Mudaraba bonds, the partner is appointed to act as the mudarib[1]. (In Shaukat's (2010) article, Common Structures of Sukuk, were described as "Mudaraba means an agreement between two parties according to which one of the two parties provides the capital (capital provider) for the other (Mudarib) to work with on the condition that the profit is to be shared between them according to a pre-agreed ratio." (p. 15).)Sukuk al-Mudaraba.png

Figure 7: The process of Mudaraba Sukuk

Steps involved in the structure above are for the beginning is Mudarib enters into an agreement with project owner for construction or commissioning of project. Second, SPV issues sukuk to raise funds. After that, Mudarib collects regular profit payments and final capital proceeds from project activity for onward distribution to investors. Continually, upon completion, Mudarib hands over the finished project to the owner.

1The entrepreneurial partner in a Mudaraba partnership who provide the expertise and management

Murabaha Sukuk

Murabaha is a particular kind of sale, compliant with shariah[1]. It is also a sale of goods at a price comprising the purchase price plus a margin of profit agreed upon by both parties concerned. Sukuk al-Murabaha is certificates of equal value issued for the purpose of financing the purchase of goods through Murabaha so that the certificate holders become owners of the Murabaha commodity (Shaukat, 2010). This Murabaha is similar in structure to rent or own an arrangement. Moreover, the intermediary retains ownership of the property until the loan is paid in full. It is very important that to prevent riba[2]. Different banks use this instrument in varying the ratio.

The intermediary cannot be compensated in addition to the agreed upon terms of the contract. In other word, if buyer is late on payment, they cannot charge any late payment penalties. Besides that, it is also one of the famous sukuk used by Islamic bank to promote the riba free transaction. Murabaha can be legally acceptable is only feasible in the primary market. It is not allow negotiate or trade in secondary market due to the permitted of shariah. The Murabaha could be negotiating when they are the smaller part of a portfolio or a package. Murabaha sukuk are popular in Malaysian market due to a more liberal interpretation of fiqh[3] by Malaysian jurists permitting sale of debt (bai-al-dayn) at a negotiated price [4].

1Moral code and religious law of Islam 2Represent Interest 3Islamic jurisprudence 4Source:Common Structure of Sukuks, Mughees Shaukat

Figure 8: The process of Murabaha Sukuk

Steps involved in the figure at above are the process of Murabaha. At the beginning, a master agreement is signed between the SPV and the borrower. Second as the 2a and 2b above, SPV issues Sukuk to the investors and receive Sukuk proceeds. After that as 3a and 3b above, SPV buys commodity on spot basis from the commodity supplier. Forth, as 4a and 4b showed above, SPV sells the commodity to the borrower at the spot price plus a profit margin, payable on installments over an agreed period of time. Fifth, 5a and 5b above mean the borrower sells the commodity to the Commodity buyer on spot basis. Lastly, the investors receive the final sale price and profits. Sukuk al-Murabaha.png

Salam Sukuk

Salam is the sale of a specific commodity, it well definite by a certificate of an equal value issued for the purpose of mobilizing Salam capital so that the good can be delivered on the basic of Salam come to the ownership of the certificate holders. The issuer of the certificates is a seller of the goods of Salam; the subscribers are the buyers of the goods, while the funds realized from subscription are the purchase price (Salam capital) of the goods [1]. In other word, the owner of the Salam good is the holder of Salam certificate. Overall in simply word, a contract in which advance payment is made for goods to be delivered later on.

After that, the goods for this Salam sukuk cannot be gold, silver, or currencies based on these metals. One of the Shariah conditions for Salam is the requirement that the purchased goods are not allow to re-sold before actual ownership at maturity. Such transactions amount to selling of debt. Moreover, this limit renders the Salam instrument illiquid and hence fairly less attractive to investors. Thus, if investor expects prices of the underlying commodity to be higher on the maturity date, the investor will buy a Salam certificate.

Sukuk al-Salam.png

Figure 9: The process of Salam Sukuk

1Source:Common Structure of Sukuks, Mughees Shaukat

Process at above involves several step to describe the transaction of Salam sukuk. At the begining, SPV signs an undertaking with an obligatory to source both commodities and buyers. The obligator contracts to buy, on behalf of the end-Sukuk holders, the commodity and then to sell it for the profit of the Sukuk holders. Second, as shown at above mean Salam certificates are issued to investors and SPV receives Sukuk proceeds and 2b above shows that the Salam proceeds are passed onto the obligator who sells commodity on forward basis. After that, SPV receives the commodities from the obligator. Lastly, 4a above shows that is a obligator, on behalf of Sukuk holders, sells the commodities for a profit and 4b shows the Sukuk holders receive the commodity sale proceeds.

Al-Istisns Sukuk

Istisna sukuk is an agreement for manufacturing good and commodities. It is allowing cash payment in advance and future delivery. In other word is future payment and future delivery. It also can be use for providing the facilities of manufacture financing or other construction. Istisna sukuk are certificates that carry equal value and are issued with the aim of mobilizing the funds required for producing products that are owned by the certificate holders (Shaukat, 2010).

Besides that, the issuer of the Istisna is the manufacturer or supplier while the buyer of the intended product is the subscriber. It is quite useful for large financing infrastructure project. After that, Shariah not allow the sale of these debt certificates to a third party at any price other than their face value. It also clearly such certificates cannot be traded in the secondary market.

Figure 10: The process of Al-Istisna SukukSukuk al-Istisna.png

From the above is showing the process of Istisna sukuk. In the figure have several steps involved at above. First, the figure shows that SPV issues Sukuk certificates to raise funds for the project. Second, Sukuk issue proceeds are used to pay the contractor/builder to build and deliver the future project. Third, title to assets is transferred to the SPV. After that, 4a and 4b mean property or project is leased or sold to the end buyer. The end buyer pays monthly installments to the SPV Last but not least, the returns are distributed among the Sukuk holders.

Hybrid Sukuk

Considering the fact that Sukuk issuance and trading are important means of investment and taking into account the various demands of investors, a more diversified Sukuk - hybrid or mixed asset sukuk - emerged in the market[1]. In this sukuk, the underlying pool of assets can include of Istisna, while the Murabaha receivables as well as Ijarah. In other word, it having a group of assets including the different of classes allows for a greater mobilization of funds. However, for thr Murabaha and Istisna contracts cannot be traded on secondary markets as securitized instruments due to the no permitted of shariah. Because of the fact Murabaha and Istisna receivables are part of the pool, the return on these certificates can only be a pre-determined fixed rate of return.

Figure 11: The process of Hybrid SukukHybird Sukuk.png

Above is showing the process of Hybrid sukuk. There are few steps involved in the structure showed above. First, Islamic finance originator transfers tangible assets as well as Murabaha deals to the SPV. After that, SPV issues certificates of participation to the Sukuk holders and receive funds. The funds are used by the Islamic finance originator. Third, Islamic finance originator purchases these assets from the SPV over an agreed period of time and the last the investors receive fixed payment of return on the assets.

Companies who have offer Sukuk Bonds

Nowadays, an investment in Islamic capital market in Malaysia was extremely demanding not only by listed firms but also unlisted firms. A Malaysian capital market was developed based on two types of famous market which are stock markets and bond markets. Moreover, Malaysia becomes to be leader country by issuing Islamic securities either Shariah compliant securities for listed firms in main market or Islamic Sukuk bonds. Below is those companies which have offered Islamic Sukuk bonds.

Cagamas MBS Berhad

- Cagamas MBS Berhad (Cagamas MBS) listing its sukuks bonds on Bursa Malaysia at 2009. This marks Bursa Malaysia's first listing of Ringgit Malaysia (RM) sukuk bonds.

Petronas Global Sukuk Ltd.

- Petronas' sukuk is structured based on the globally accepted shariah principle of Ijarah.

GE Capital Sukuk Ltd.

-Sukuk bonds sold through GE Capital Sukuk Ltd. and the issue will be of a benchmark size since 2009.

CIMB Islamic Bank Berhad

-CIMB' sukuk is Tier 2 Junior Sukuk Programme of up to RM2.0 Billion in Nominal Value.

Wakala Global Sukuk Berhad

-USD2.0 billion Trust certificates issued by Wakala Global Sukuk Berhad

Paka Capital Ltd

-Paka Capital Ltd offered a zero coupon exchangeable trust certificates since 2008.

Khazanah Nasional Berhad

-Offered a government guaranteed sukuk issuance facility at 2009.

Danga Capital Berhad

-Offered a Ringgit- denominated Islamic securities and multi-currency denominated Islamic securities program.

Rantau Abang Capital Berhad

-Offered an Islamic medium term notes issuance program.

Sime Darby Berhad

- Sime Darby Berhad's Islamic Programmes comprising an Islamic Medium Term Note Programme of RM4.5 billion and an Islamic Commercial Paper / Islamic Medium Term Note Programme of RM500 million with a Combined Master Limit of RM4.5 billion.

1Malaysia Sukuk Global Berhad

- USD1.25 billion Trust Certificates issued by 1Malaysia Sukuk Global Berhad, a special purpose vehicle established by the Government of Malaysia

AmIslamic Bank Berhad

- Senior Sukuk Musyarakah Programme of up to RM3.0 billion in nominal value

Tadamun Services Berhad

-Offered a Trust Certificate Issuance Programme of RM1.0 Billion

Malaysia Airports Capital Berhad

- The first tranche of Islamic medium term notes ("1st IMTN Issuance") of RM1.0 billion nominal value issued under the Islamic medium term notes programme

IDB Trust Services Limited

- Trust Certificate Issuance Programme of US$3.5 Billion at the rental rate of 1.775%

Pulai Capital Limited

- USD357,800,000 Exchangeable Trust Certificates due 2019 exchangeable into ordinary shares of par value of HKD0.02 each of Parkson Retail Group Limited

Conclusion

Until today, Sukuk has now become the strongest part in Islamic finance. It also involved in the international market and generates a major cross-border flow of funds as may be achieved beyond domestic markets. The sukuk market is now maturing and there is an increasing momentum in the wake of interest from issuers and investors. Although it is strongest part in Islamic finance, it still has to develop more and all countries have the possible to expand the role of Islamic finance.

Besides that, invest on sukuk are the best investment for investors requiring a fixed investment return with low risk. Sukuk also should be issued for new commercial and industrial ventures. If they are issued for build up businesses, then the sukuk must make sure that sukuk holders have entire ownership in real assets. There are different type of sukuk structures and have been rising over the years but most of the sukuk issuance to date have been ijarah sukuk. Since they are based on the undivided pro-rata ownership of the underlying leased asset, it is freely tradable at par, premium or discount.

The tradability of the sukuk makes them more attractive in the secondary market. Although there is less common than Ijarah sukuk, other types of sukuk are also playing important role in emerging markets to help issuers and investors similarly to participate in major projects. The independent sukuk issues, following Malaysias lead are enjoying common and positive acclaim among Islamic investors and global institutional investors in a similar way. Last but not least, sukuk bonds are playing an important role not only for Islamic. It will be very popular among the worldwide in coming year.


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